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Tuesday, July 6, 2010

My Attempt to Alleviate Concerns About the FairTax

Understandably, some people have concerns regarding the FairTax proposal. Here is my attempt to alleviate some of them:

Low income and middle class households will have to pay more under the FairTax than the income tax. That could be true if they spend all of their income on taxable goods. Since most of these households would be spending some of their income on house payments of older homes and used vehicles, both of which would be FairTax exempt purchases, their tax burden would be less. Also, the prebate offsets FairTaxes paid on purchases up to the poverty level.

Big corporations get all the breaks, while the U.S. consumer gets the shaft. Currently, big corporations already get tax breaks that small businesses could not take advantage of. Under the FairTax proposal, big and small companies alike would be exempt from paying the FairTax on purchases for business purchases. The tax savings would allow companies to price their products more competitively (giving the American consumer more purchasing power) or expand their business (creating more jobs).

The 23 percent tax rate would not be enough to replace income tax revenues. Granted, the top income tax rate for top earners is 35 percent, but that rate only applies to part of their income. Taxpayers in that tax bracket have found ways to shelter and/or hide income to avoid paying income taxes. The FairTax makes it hard for anyone to avoid paying taxes.

Americans will create sham businesses to make tax free purchases. Businesses would be exempt from paying the FairTax only on purchases for business purposes. Businesses would still be subject to audits, back taxes, and penalties, which would be the deterrent to invoking the exemption for personal use. Since citizens themselves would no longer be subject to audits, more focus would be on businesses to be compliant. Nevertheless, to those who do start a business for the purpose of avoiding the FairTax and can justify the business use of tax exempt purchases, more power to them! Businesses, after all, make huge contributions to the economy, and the FairTax helps businesses contribute their part.

Manufacturing and Retail Industries will suffer. Every time that I’m shopping for groceries or looking at steak prices on a menu, I never think about how much extra I’m paying for sales tax. When I’m shopping for a vehicle, though, I will take sales tax into consideration. If/when the FairTax passes and goes into effect, I’m sure shoppers will take the FairTax rate into consideration, especially the larger purchases. They, however, would have more purchasing power due to federal income taxes and FICA no longer taken out of their paychecks. There may be a noticeable shift in buying habits but not drastic.